Why China can’t rev up its economy now the way it did during the global recession

China’s GDP grew 6.2% in the second quarter of this year, the slowest pace of growth since it began releasing quarterly data in 1992.

For the first half of the year, the country’s GDP increased by 6.3%, compared with 6.8% for the same period a year ago, according to data from the National Statistics Bureau (in Chinese) on Monday (July 15).

Once the world’s fastest growing economy that thrived on cheap labor and substantial government investment in infrastructure, China is now facing challenges on both the domestic and external fronts. A long-simmering trade battle with the US led China’s June exports to contract from 2018 due to higher tariffs on hundreds of billions of dollars of US-bound Chinese goods. China’s imports that month also shrank in the face of sluggish domestic demand. June retail sales did better than expected, however, after expanding by only 9% in 2018, the slowest pace in 15 years.

The country is targeting GDP growth of around 6% to 6.5% for the whole year—a goal deemed as being “in line with China’s actual situation,” said premier Li Keqiang (in Chinese) in March. China’s economy grew 6.6% in 2018, in line with expectations and above its target of 6.5%.

Beijing is on a tricky path when it comes to balancing the need for maintaining growth and controlling financial risks relating to its massive debt levels. A spokesman for the statistics bureau described economic conditions as “severe” and said the economy was under “new downward pressure.” Trade talks with the US collapsed in May and even though the two sides have agreed to restart them, it’s unclear what sort of a deal they can reach, and by when.

In this slowdown, some of the country’s most effective tools for spurring growth might not be as handy as before. A decade ago, China responded quickly to the global financial crisis by launching a stimulus package of $586 billion over two years, with around one-third of that money being spent on infrastructure, especially “mega-projects” such as railways and roads, according to the World Bank. As a result, the country’s GDP grew by 8.7% (in Chinese) in the following year and surpassed Japan as the world’s second-largest economy in 2010.

However, China’s growing debt levels, and concerns about overcapacity in a number of sectors, mean the country is unlikely to splash money as generously on projects as before. The country’s ratio of non-financial debt to GDP reached 254% in the fourth quarter of 2018, the highest level since 2013. A decade ago, the debt-to-GDP ratio was about half that. Overall, the country has a $34 trillion pile of public and private debt, according to Bloomberg.

A large chunk of that debt has gone to finance corporations, especially state-owned entities, as well as local governments that are keen on spurring growth by building more infrastructure. Still, analysts expect Beijing to continue rolling out some level of financial stimulus this year to create jobs and maintain social stability. The country announced tax cuts worth 2 trillion yuan ($291 billion) earlier this year, for instance, which may be helping to boost retail spending.